Understanding crypto trading volume
What you'll learn
- What does volume mean?
- Why is it important
- Common volume indicators
- Dangers within volume data
- 2024 developments related to crypto trading volume
If you’re sequentially following Learn crypto’s section on how to trade cryptocurrency, you’ll be gradually learning about the basic tools for understanding price patterns and signals.
Learning how to trade cryptocurrency comes down to how successful you are at doing that, and one of the most fundamental influences of price is volume.
So what do we mean by volume? Volume refers to how much - in monetary terms - a given cryptocurrency has traded over a period of time.
Volume is important because it has such a significant impact on price from both an absolute and relative perspective.
Total Volume & Market Efficiency
The total volume traded for a given cryptocurrency has a direct relationship with how volatile it is. Remember, price represents the balance of opinions between buyers and sellers.
If an equal amount (in terms of volume) is being bought and sold then price will be stable, but stability suggests that people’s opinion about the price are well informed; this is known as market efficiency.
Mature markets with significant volume and good price discovery have less volatility. Cryptocurrency is inherently volatile because it is immature and its adoption path is uncertain. Market participants are an unusual mix of recreational investors (hodlers), miners, speculators and institutional investors each with varying opinions and motivations, with those opinions subject to significant outside influences.
So when looking at trading a given cryptocurrency, the total volume traded will immediately tell you how volatile it is likely to be. The change in volume over time will also give you a sense of interest in the project.
It may seem a bit obvious but in order to trade a particular cryptocurrency it has to be listed on an exchange. Exchanges choose which coins to trade, and being listed on the bigger exchanges can make a huge difference to volume.
If, for example, you have an opinion about an obscure cryptocurrency and want to buy it at a specific price. The absence of volume is going to make that really hard - there won’t be enough buyers and sellers, so the difference between the available Offers (buyers) and Bids (sellers) - known as the Spread - will be wide.
The wider the spread, the less efficient a market and therefore the more volatile. Websites like Coinmarketcap provide historical volume data.
This is the data for Bitcoin - ranked no.1 by market capitalisation
This is the same information for a coin ranked 500 calling Shopping
The daily volume for Shopping is so low that any significant new volume of trading will have a big impact on the market. The volume indicated is spread across a number of exchanges, each of which will have inefficient markets for anyone wanted to buy and sell the Shopping coin.
Coinmarketcap provides a Liquidity Score for each cryptocurrency on the exchanges where it is traded, essentially a measure of how deep the Order Book is, and the likelihood that Buying or Selling will adversely affect the price, what is known as Slippage.
Relative Volume
Volume in aggregate can provide useful information about how much a cryptocurrency is traded and how efficient a market is. Relative volume, how much volume is associated with price movement, can help inform price direction.
When using a trading chart you have to select the Volume indicator from the menu, which will be illustrated as a bar chart at the base.
The volume bars will correspond to the time period already chosen for the Candlesticks. The higher the bar, the greater the volume; green bars are associated with a positive price move within the Candle, while red bars indicate a falling price associated with the volume.
Common Volume Indicators
Momentum
Increasing volume of buying will push the price of a cryptocurrency higher, but for that to continue, volume must be maintained. In that way, volume can be a good indicator of price momentum.
Rising prices on declining volume can indicate declining momentum and potential reversal. Falling prices on declining volume can equally signal a shift in direction.
Spikes & Exhaustion
Though spikes in volume can be associated with new momentum in either direction, they can also signal the tail end of a move, in what is known as Exhaustion. A large spike in volume might indicate that laggards are buying into a move as it peaks, exhausting the buyers or sellers, and signalling the end of the move.
On Balance Volume
On Balance Volume is a simple measure of the influence of changes in volume that can be correlated with price. To calculate OBV start with an arbitrary number say 100, and if daily volume increases add the volume to OBV; if it decreases, subtract it.
Money Flow Index (MFI)
Money Flow Index runs from 0-100 and uses volume as an indicator of overbought or oversold conditions. Much like Relative Strength Index it is a measure of whether the market is getting overheated.
MFI values above 80 are suggestive of a price reversal due to excessive buying volume, whereas a value of 20 or lower may suggest the opposite - excessive selling volume and oversold conditions.
These examples are just a few of the possible indicators commonly used in Technical Analysis, and illustrate one of the biggest difficulties facing a Trader. What tools choose from among the multitude of potential indicators?
Given you are just starting out, it is wise to keep it simple and use volume as part of a general assessment of liquidity (and potential slippage) and as an aid to momentum.
Our next article on how to trade crypto will introduce some of the most commonly used technical indicators which can be used alongside the skills acquired so far in terms of understanding price discovery, price charts, candlesticks and volume.
Regulatory changes impacting trading volume in 2024
As of 2024, there aren't very many precise regulations that directly affect trading volume, although crypto exchanges that offer discounted trading fees to their largest customers are required to ask for more detailed information from such customers.
For example, OKX in mid-July 2024 mirrored earlier changes from rival exchange Binance in requiring much more information from prime brokerages, including subaccount details such as the names of individuals and entities that controlled each subaccount and the jurisdiction where they were located.
In a letter to Coinbase, OKX warned: "A failure to do so may result in undisclosed subaccounts being restricted from trading and/or subaccount closure,"